What You Should Know About Federal and Private Student Loan Consolidation


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Federal and private student loan consolidation gives you the flexibility to combine multiple loans into one and could save you money in interest over time. (iStock)

If you graduated with multiple student loans, you might consider combining them into one loan with just one monthly payment. Depending on the types of loans you have, there are two different ways you can do this.

You can consolidate federal loans using a special program from the US Department of Education. With private loans, you will have to refinance. Although the two approaches are similar, it is essential to know the difference before applying for a loan. This article will cover student loan consolidation and refinancing and when you might choose one over the other.

Credible makes it easy to compare the student loan refinancing rates of several lenders.

Student Loan Consolidation vs. Refinancing: What’s the Difference?

Student loan consolidation involves combining several federal student loans with the help of a direct consolidation loan through the United States Department of Education.

Your current federal loans are combined into one loan with one monthly payment, and the fixed interest rate you pay is the weighted average of the interest rates on your current loans. This means that you won’t save money on interest, but you might have access to different repayment plans under your new consolidation loan, including an income-based repayment or an extended repayment term.

You will also retain the benefits of federal loans, including deferral options and loan cancellation (if you qualify). If these are important to you, you will probably want to consider consolidating rather than refinancing.

Refinancing student loans is similar. You apply for and take out a new loan from a private lender to pay off your current student loans, leaving you with one loan with one monthly payment.

Private loans must be refinanced rather than consolidated, but you can also choose to refinance federal student loans into your new private loan. The interest rate on refinancing your student loan may be lower than the rates you are currently paying, depending on your financial situation and market conditions. This means that you could save money on your monthly payment.

If you have mainly private student loans and qualify for a lower interest rate, you will probably want to consider refinancing your loans.

What you need to know about the federal student loan consolidation

To consolidate your federal student loans, you will apply for a direct consolidation loan from the US Department of Education. You can do it in line, or you can choose to print a request and send it by mail. There are no application fees or costs associated with a consolidation loan.

You usually become eligible for consolidating your federal loans after you graduate or leave school, or become a part-time student taking less than half a standard course load. Your current loans must be up to date on their payments, or you must have a new repayment plan in good standing or be prepared to use an income-based repayment plan.

When you apply for a direct consolidation loan, you will choose a repayment plan for your new loan. It can be a standard plan with fixed payments that will satisfy your loan within 10 to 30 years. You can also choose a graduated repayment plan, with payments that start out low but increase over time, or an income-based repayment plan where you pay a fixed percentage of your discretionary income.

Benefits of the Federal Student Loan Consolidation

  • One-time monthly payment – Consolidating your federal loans requires multiple monthly payments and due dates and combines them into one easier to follow payment.
  • Many reimbursement options – A federal consolidation loan offers several choices for paying it off, including income-based repayment options that can save you money when you start your career.
  • Loan forgiveness potential – The federal government offers a loan rebate to teachers, public servants and people who have paid according to an income-oriented plan for 20 to 25 years. You will still be eligible for it with a direct consolidation loan.

Disadvantages of the Federal Student Loan Consolidation

  • You might not save on interest – Since your direct consolidation loan will have an interest rate that is the weighted average of your current rates, you may not be saving money on interest payments.
  • Longer loan terms – Consolidating loans often means extending the period you pay, which means you will carry your debt longer and maybe pay more interest during the life of the loan.
  • Can reset loan discount – Federal loans offer loan forgiveness after a certain period of time under certain circumstances. Consolidating your loans can restart the clock on this matter.

If you think private student loan refinancing is right for you, you can compare the prequalified rates of several lenders using Credible.

What to know about refinancing student loans

Refinancing your student loans involves take out a new private student loan to repay and replace your current loans. Many lenders offer refinancing options.

You will apply for the loan, go through a credit check, and receive an offer for an interest rate and loan terms for which you qualify. If you accept the loan, the money will be used to pay off your current loans. You end up with just one new loan.

Benefits of refinancing student loans

  • One-time monthly payment – Just like consolidation, student loan refinancing gives you the ability to combine multiple maturities and payments into one loan with an easier-to-follow monthly payment.
  • May be eligible for lower interest rates – Student loan refinancing leaves you with a new loan with a new interest rate. If you’ve graduated, started a career, and improved your credit, you may be eligible for a much lower interest rate than you received when you took out your initial loans. This will save you money in interest payments.
  • May release co-signers – If you needed a co-signer to take out your current student loans, refinancing your loan may give you the option to release the co-signer and take over the loans on your own. You will need to have good credit and be able to qualify for the loan.

Disadvantages of refinancing student loans

  • Interest rates may be higher – The interest rate offered to you is based on your financial situation and current market conditions. Take a close look at the interest rates you are offered and compare them to the rates you are currently paying. If your credit score has gone down, you might not get a better deal.
  • May lose federal benefits – You can choose to refinance private or federal student loans. However, if you choose to refinance federal student loans, you will lose all of the benefits and protections that federal loans offer. Most private refinance loans do not offer income-based repayment, for example.
  • May lose tax deductions – Your refinance loan may not qualify for the student loan interest tax deduction, which means you may have to pay higher taxes. If you use this deduction, be sure to keep it before you refinance.

How to consolidate loans through refinancing

Federal student loan consolidation and student loan refinancing combine several student loans into one with a single monthly payment. In either case, you’ll start with a loan application, either from the US Department of Education or from a private lender.

Before you move forward, take stock of your current loans, the repayment plans you have, the monthly payment you are making, and the interest rates you are paying. Be especially careful before refinancing federal student loans into a private loan. It may become clear that a method of consolidating your loans may be more suitable for you.

TO find your prequalified rates for refinancing multiple student loans, visit Credible and compare loans from multiple lenders.